How your credit score affects car insurance rates | finder.com
How your credit score affects car insurance rates

How your credit score affects car insurance rates

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It’s controversial, but lower credit could lead to higher car insurance premiums.

When you apply for a car insurance policy, most insurers check your credit-based insurance score, as opposed to a traditional credit score, and use it to set your premiums. Drivers with a good credit-based insurance score are usually rewarded with lower rates, though the practice is banned in some states.

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What is my credit-based insurance score?

When you hear credit score, it usually refers to your FICO score or VantageScore — a three-digit number that reflects your creditworthiness. It paints a picture of your financial behavior and lets lenders know if can manage a loan and pay your bills on time.

However, car insurers don’t look at your regular credit score. Instead, they analyze certain aspects of your credit history to create a credit-based insurance score, which is weighted differently.

This is because insurance companies only care about the information that relates to potential car insurance losses. Unlike lenders and financial institutions, they aren’t concerned with your location and income, though both aim to determine the level of risk. Agencies like FICO, LexisNexis and TransUnion calculate credit-based insurance scores (CBIS).

These agencies look for:

  • Payment history, including late payments and delinquencies
  • Length of credit history
  • Number and types of credit accounts, such as credit cards and loans
  • Outstanding debt
  • Credit utilization
  • Applications for new credit

How does my insurance-based credit score affect car insurance rates?

Your credit score could be costing you thousands in car insurance rates. Raising your credit score by 100 points could potentially save you up to $1,000 a year on your car insurance.

Just how much you can save varies based on your score and provider. But, as an example, those with poor credit often pay over 40% more on car insurance than those with higher scores. Even an increase from fair to good credit often saves around 17% with big name providers.

That means you might be paying $1,820 per year for car insurance with fair credit. But if you improve your score by just one level, you could instead pay $1,510 per year — a savings of $310.

Car insurance cost by credit score

CreditAverage
Good$3,275
Fair$3,945
Poor$5,652
All$4,284

How is my credit score used to determine rates?

The extent that your credit score affects your rates varies between providers. That’s because insurers use their own algorithms to calculate rates. However, if you have a low score, you’re deemed a higher insurance risk and may end up paying a higher premium. On the flipside, if you have a high score, you’ll likely be charged a lower premium.

Since insurance companies look at different aspects of your credit history than creditors and lenders, they use different formulas to evaluate you.

Each agency has its own model for credit-based insurance scores. TransUnion’s scores range from 200 to 997, with a good score of 770 or above.

If you have a high credit-based insurance score, an excellent driving record and no recent claims, you’ll typically qualify for lower rates. In comparison, drivers with average insurance scores may pay 24% more, while those with poor credit scores could face an increase of 91%.

Since your credit score impacts your insurance score, it helps to assess both scores side by side. Let’s say you’re an unmarried person in New York driving a 2017 Toyota Camry. When it comes to auto insurance, there’s only a 17% price difference between good and fair credit, but bumping your credit score from poor to fair could save you over $1,700 a year.

How to save on car insurance without perfect credit

When purchasing car insurance with not-so-great credit, these tactics can help you save money:

  • Build credit. Learn about how to build your credit and work toward getting that number to 670 or higher.
  • Maintain a clean driving record. A clean record proves you’re a responsible driver, even without a great credit score to back you up.
  • Get every discount possible. Find helpful savings such as discounts for completing a safe driving course, student discounts and automatic payments.
  • Lower coverage. Strip away additional coverage you might not need, such as better car replacement or original manufacturer parts coverage.
  • Raise the deductible. You’ll pay more if you’re in an accident, but raising your deductible can lower your premium. But be aware that the savings on your premium may not be worth the extra cost to you in the event of an accident.
  • Go claims free. Consider not making an accident claim when the damage doesn’t go above your deductible and the incident doesn’t involve another driver.

Compare insurance without perfect credit

Name Product Roadside assistance New car protection Accident forgiveness Available states
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Drivers in these states can apply: AK, AL, AZ, CA, CT, DC, FL, GA, HI, ID, KS, MA, MD, ME, MT, NC, NE, NH, NJ, NY, OH, OR, SC, TN, TX, UT, VA, VT, WA, WY
As the nation’s second largest auto insurance company, Geico streamlines the process of purchasing car insurance. Drivers in these states can apply: AK, AL, AZ, CA, CT, DC, FL, GA, HI, ID, KS, MA, MD, ME, MT, NC, NE, NH, NJ, NY, OH, OR, SC, TN, TX, UT, VA, VT, WA and WY.
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AZ, CA, IL, NJ, OR, PA, VA, WA
Drive less than 30 miles a day? Save on the coverage you need with pay-per-mile insurance from Metromile. Get a low monthly rate then pay just a few cents per mile. Available in AZ, CA, IL, NJ, OR, PA, VA and WA.
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Car insurance through Liberty Mutual will give coverage options for almost any situation.
AZ, AR, CO, DE, GA, IL, IN, IA, KY, LA, MD, MI, MS, MT, NE, NM, ND, OH, OK, OR, PA, SC, TX, UT
Root offers simple, affordable insurance that’s ideal for good drivers. Try the Root app for 2 weeks and see how much you could save. Available in 24 states.
All states except AK, DE, HI, MT, NH, VT, WY
Esurance offers a modern online and mobile experience that helps you take your insurance on the go. Available in 42 states.
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Backed by nearly 100 years in the business, Farmers Insurance aims to offer options and support to help you find the coverage you need.

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How do I check my credit-based insurance score?

You can request your credit report from the three major credit reporting agencies — Equifax, Experian and TransUnion — once a year. Your score may also appear on your credit card or loan statement.

For your credit-based insurance score specifically, you can purchase the score created by LexisNexis and FICO through each of their sites. However, to obtain your TransUnion score, you’ll have to ask your insurance provider for access.

If you live in Illinois, Missouri, Colorado, Tennessee or Kansas, you can take advantage of Say Insurance. The startup provides your LexisNexis score for free when you request a quote for one of its car insurance policies.

How do I improve my credit-based insurance score?

Knowledge is power! To boost your credit-based insurance score, start by requesting it. On the report, you’ll see a list of factors that went into the calculation of the score. Rebuilding your credit score takes time, but these steps will put you on the right track.

  • Start at the top of the report. The first two factors listed in the report have the most significant effect. Focus on these areas of improvement first.
  • Order and review your credit report. Check it for accuracy. If you find any errors, file a dispute with the appropriate credit bureau.
  • Pay your bills on time. This proves to lenders that you’re reliable and can manage your finances. It also helps you to skirt late fees, which can really add up over time. If you have trouble remembering to pay your bills, you could try paying your credit card bills twice a month. That’s also a good way to pay back more than the minimum and get ahead of any extra debt on your account.
  • Fix late payments. If you have a legitimate reason for missing a payment, consider writing a goodwill letter to your creditor.
  • Be conservative with your credit. Aim to utilize 30% or less of your available credit. For instance, if your credit limit is $1,000, keep your balance below $300. This shows lenders that you’re only spending money you can quickly pay back.
  • Don’t open too many new accounts. Every time you apply for a credit card or loan, it’s listed on your credit report and may drag down your score. For now, avoid applying for unnecessary lines of credit.
  • Pay down any debt you may have. The more aggressively you pay off debt, the better.

Why do insurers check credit scores?

Insurers check your credit-based insurance score to predict whether you’ll file claims. Insurance is all about balancing risk, so they use that information to decide if they’ll offer you coverage and to set your premium.

But what does your credit history have to do with your risk as a driver?

According to the Insurance Information Institute, there’s a direct correlation between credit and insurance claims. Statistics show that drivers with low insurance scores are more likely to file frequent and costly claims and receive payouts than those with high insurance scores. It also states that individuals with low scores are the ones who tend to exaggerate claims or commit insurance fraud.

FICO adds that there’s a link between the way people use credit and the way they drive and maintain their car. In other words, if you’re careful with credit, experts argue that you’ll be more careful on the road. In an independent study, the Federal Trade Commission also found that insurance scores are effective predictors of risk.

Insurers err on the side of caution, which is why these statistics have led many to crack down on drivers’ creditworthiness. They aren’t willing to take on more risk than they need to, even though the use of credit-based insurance scores is controversial.

When do insurers check my credit?

When you apply for a policy, around 90% of insurers will ask for your permission to check your credit score. They’ll then pull your credit report from one of the three major credit bureaus and use that to calculate your insurance score. Insurance companies do a soft pull, which appears on your credit report but typically won’t harm your score.

Does my current insurer check my credit?

It depends on where you live. In the following states, insurers must recalculate credit scores every three years, which means that you could score a cheaper rate if your credit history has improved.

  • Arkansas
  • Colorado
  • Florida
  • Georgia
  • Iowa
  • Louisiana
  • Montana
  • Nevada
  • New Mexico
  • New York
  • North Dakota
  • Oklahoma
  • Tennessee
  • Virginia

Outside of those states, your current insurer doesn’t have to factor your new-and-improved credit score into your renewal rates. And in Alaska, insurers can only use your credit score when you first buy a policy.

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Can insurers check my credit in my state?

Unless you live in California, Hawaii or Massachusetts, you can assume that your car insurer will pull your credit-based insurance score. In those three states, the practice is banned. Instead, your rates will be determined by your driving record, driver profile and personal information.

A few other states restrict the use of credit information for renewals and cancellation. For instance, in Pennsylvania, insurers can only check your credit when you’re renewing your policy, and can only use it if it results in a lower rate.

In Texas, Georgia, Utah and Washington, insurers can’t legally use a customer’s credit score as the sole reason for denying or not renewing coverage.

New York, Illinois, Florida and Texas stipulate that insurers disclose if and when they used credit information in their decision to deny, cancel or not renew a policy.

Compare car insurance laws in your state

Why is credit scoring considered unfair?

Although they’re widely used, credit-based insurance scores are hotly contested. Its opponents say that they unfairly punish those who are dealing with financial factors out of their control, such as medical debt or layoffs. These situations can really hurt your credit, even if you’re a responsible spender. Some compare it to redlining and argue that it discriminates against minorities and low-income applicants. They say credit scoring drives up insurance costs for those groups who are least able to pay.

For other consumer advocates, credit scores simply aren’t relevant to driver risk. They argue that there’s no connection between driving skills and spending habits, and that driving records and claims histories are much better indicators of risk. That’s why some states are banning this practice.

Bottom line

Over 90% of insurers check your credit score to establish your eligibility and determine your rates, along with other factors. It’s a common, though controversial, practice in most states.

If you have a high credit-based insurance score, a clean driving history and zero claims on your record, you’ll typically qualify for cheaper rates. And while it’s possible to get a policy without a credit check, you’ll probably pay a higher premium.

Each insurer has its own algorithm, so be sure to shop around for the best rate.

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